UK construction activity shrinks at record pace: CIPS

The Chartered Institute of Purchasing and Supply/Markit construction PMI fell to 36.7 last month -- the lowest reading since the survey began in 1997 -- from 38.8 in June.

Any reading below 50 signals contraction.

The weak figures add to a growing raft of evidence pointing to a sharp economic downturn, with fears growing that Britain is about to enter its first recession -- two consecutive quarters of contraction -- since the early 1990s.

‘There can therefore be little doubt that the construction sector is now firmly in recession,’ said Howard Archer, an economist at Global Insight.

‘The sector looks to be in for an extended, very difficult time. This reinforces our belief that the overall economy is more likely than not to contract in the second half of 2008.’

However, the Bank of England is not expected to cut interest rates for some time yet because inflation is running at 3.8 percent, its highest rate in more than a decade and almost twice the central bank's 2 percent target.

The Bank will deliver its latest rates decision on Thursday, with borrowing costs at 5 percent.

HEAVY JOB CUTS

Britain's construction sector is particularly vulnerable to the credit crunch and the economic downturn because its boom was helped by big government spending on infrastructure and the kind of cheap money that helped trigger the lending squeeze.

While banks have tightened up their lending terms and the credit crisis has made cash harder to come by for homebuyers and construction projects, government spending is also likely to wane as the economy weakens and tax receipts fall.

Sharp declines in construction activity could still hit banks hard.

Official second quarter data from the Bank of England on Monday showed bank lending to real estate firms up by about a fifth and lending to construction companies up by about a quarter on the year.

‘The risks to banks' balance sheets are clear from the interplay between the extreme weakness of UK property markets and the relatively high level of banks' exposure to real estate firms,’ said Michael Saunders, an economist at Citigroup.

The CIPS housing sub-index fell to a series low of 18.7 in July from 25.6, the eighth consecutive fall.

‘Housing was again the sick man of the industry, as levels of activity plunged to a record low,’ Roy Ayliffe of CIPS said. ‘July marked an end to constructors' optimism about recovery.’

Housebuilders have shed thousands of jobs in recent weeks as mortgage approvals dive to record lows and house prices fall at rates not seen since the crash of the early 1990s, after a decade in which prices trebled and construction boomed.

The Nationwide building society reported the sharpest annual house price falls in July since its series began in 1991 and the House Builders Association has warned around 100,000 jobs could be lost.

So far since the end of June, about 5,000 jobs have gone.

‘With workloads lower and cost pressures remaining intense, jobs in the sector were shed at the fastest rate in over eleven years of the survey's existence,’ the CIPS report said.

The sector has also not escaped the ravages of rising costs, running at record levels in services and manufacturing.

The input price index came in at 79.0 in July, slightly down from 81.1 in June, but still indicating substantial increases in the prices of raw materials.